<PAGE>

                                                                           1997
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________________ TO __________________

COMMISSION FILE NO. 1-2438

                             INLAND STEEL COMPANY
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                DELAWARE                                 36-1262880
        (STATE OF INCORPORATION)            (I.R.S. EMPLOYER IDENTIFICATION NO.)

30 WEST MONROE STREET, CHICAGO, ILLINOIS                   60603
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                 (ZIP CODE)

  REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 346-0300

  REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(A) AND
(B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
                                                     NAME OF EACH EXCHANGE
         TITLE OF EACH CLASS                          ON WHICH REGISTERED
         -------------------                         ---------------------
<S>                                              <C>
FIRST MORTGAGE BONDS:
 SERIES R, 7.90% DUE JANUARY 15, 2007            NEW YORK STOCK EXCHANGE, INC.
</TABLE>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                     NONE

  INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES  X .  NO    .

  INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN ANY AMENDMENT TO THIS FORM 10-K. [X]

  THE NUMBER OF SHARES OF COMMON STOCK ($1.00 PAR VALUE) OF THE REGISTRANT
OUTSTANDING AS OF FEBRUARY 2, 1998 WAS 980, ALL OF WHICH SHARES WERE OWNED BY
INLAND STEEL INDUSTRIES, INC.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

                                    PART I

ITEM 1. BUSINESS.

  Inland Steel Company (the "Company"), a Delaware corporation and a wholly
owned subsidiary of Inland Steel Industries, Inc. ("Industries"), is an
integrated domestic steel company. The Company produces and sells a wide range
of steels, of which approximately 99% consists of carbon and high-strength
low-alloy steel grades. It is also a participant in certain iron ore
production and steel-finishing joint ventures.

  The Company has a single business segment, which is comprised of the
operating companies and divisions involved in the manufacturing of basic steel
products and in related raw materials operations.

OPERATIONS

 General

  The Company is directly engaged in the production and sale of steel and
related products and the transportation of iron ore, limestone and certain
other commodities (primarily for its own use) on the Great Lakes. Certain
subsidiaries and associated companies of the Company are engaged in the mining
and pelletizing of iron ore and in the operation of a cold-rolling mill and
steel galvanizing lines. All raw steel made by the Company is produced at its
Indiana Harbor Works located in East Chicago, Indiana, which also has
facilities for converting the steel produced into semi-finished and finished
steel products.

  The Company has two divisions--the Inland Steel Flat Products Company
division and the Inland Steel Bar Company division. The Flat Products division
manages the Company's iron ore operations, conducts its ironmaking operations,
and produces the major portion of its raw steel. This division also
manufactures and sells steel sheet, strip and certain related semi-finished
products for the automotive, appliance, office furniture, steel service center
and electrical motor markets. The Flat Products division closed its plate
operations at year-end 1995. The Bar division manufactures and sells special
quality bars and certain related semi-finished products for forgers, steel
service centers, heavy equipment manufacturers, cold finishers and the
transportation industry.

  The Company and Nippon Steel Corporation ("NSC") are participants, through
subsidiaries, in two joint ventures that operate steel-finishing facilities
near New Carlisle, Indiana. The total cost of these two facilities was
approximately $1.1 billion. I/N Tek, owned 60% by a wholly owned subsidiary of
the Company and 40% by an indirect wholly owned subsidiary of NSC, operates a
cold-rolling mill. I/N Kote, owned equally by wholly owned subsidiaries of the
Company and NSC (indirect in the case of NSC), operates two galvanizing lines.
The Company is also a participant, through a subsidiary, in another
galvanizing joint venture located near Walbridge, Ohio.

 Raw Steel Production and Mill Shipments

  The following table shows, for the three years indicated, the Company's
production of raw steel and, based upon American Iron and Steel Institute
data, its share by percentage of total domestic raw steel production:

<TABLE>
<CAPTION>
                                                     RAW STEEL PRODUCTION
                                              ----------------------------------
                                                             INLAND STEEL
                                              INLAND STEEL COMPANY AS A % OF
                                                COMPANY       U.S. STEEL
                                              (000 TONS*)      INDUSTRY
                                              ------------ -----------------
      <S>                                     <C>          <C>               <C>
      1997...................................    5,814            5.4%**
      1996...................................    5,519            5.3
      1995...................................    5,419            5.2
</TABLE>
--------
*Net tons of 2,000 pounds.
**Based on preliminary data from the American Iron and Steel Institute.

  The annual raw steelmaking capacity of the Company is 6.0 million net tons.
The basic oxygen process accounted for 92% of raw steel production of the
Company in both 1997 and 1996. The remainder of such production was accounted
for by electric furnace.

                                       1
<PAGE>

  The total tonnage of steel mill products shipped by the Company for each of
the five years 1993 through 1997 was 5.3 million tons in 1997; 5.1 million
tons in 1996; 5.1 million tons in 1995; 5.2 million tons in 1994 and 4.8
million tons in 1993. In 1997, sheet, strip and certain related semi-finished
products accounted for 82% of the total tonnage of steel mill products shipped
from the Indiana Harbor Works, and bar and certain related semi-finished
products accounted for 18%.

  In each of 1997 and 1996, approximately 94% of the shipments of the Flat
Products division and 98% and 92%, respectively, of the shipments of the Bar
division were to customers in 20 mid-American states. Approximately 76% of the
shipments of the Flat Products division and 92% of the shipments of the Bar
division in 1997 were to customers in a five-state area comprised of Illinois,
Indiana, Ohio, Michigan and Wisconsin, compared to 74% and 82% in 1996. Both
divisions compete in these geographical areas, principally on the basis of
price, service and quality, with the nation's largest producers of raw steel
as well as with foreign producers and with many smaller domestic mills.

  The steel market is highly competitive with major integrated producers,
including the Company, facing competition from a variety of sources. Many
steel products compete with alternative materials such as plastics, aluminum,
ceramics, glass and concrete. Domestic steel producers have also been
adversely impacted by imports from foreign steel producers. Imports of steel
mill products accounted for 24.1% of the domestic market in 1997, up from
23.3% in 1996 but below the 1984 peak of 26.4%. Many foreign producers are
owned, controlled, or subsidized by their governments, allowing them to ship
steel products into the domestic market despite decreased profit margins or
losses on such sales.

  Mini-mills provide significant competition in various product lines. Mini-
mills are relatively efficient, low-cost producers that manufacture steel
principally from scrap in electric furnaces and, at this time, generally have
lower capital, overhead, employment and environmental costs than the
integrated steel producers, including the Company. Mini-mills have been adding
capacity and expanding their product lines in recent years to produce larger
structural products and certain flat rolled products. Thin-slab casting
technologies have allowed mini-mills to enter certain sheet markets
traditionally supplied by integrated producers. Several mini-mills using this
advanced technology are in operation in the United States and a significant
increase in modern mini-mill capacity is anticipated within the next two
years.

  Certain facilities at the Indiana Harbor Works have been permanently closed
and others have been shut down for temporary periods. All coke batteries were
closed by year-end 1993, a year earlier than previously anticipated. An
additional provision was required with respect to those closures. (See
"Environment" below.) At year-end 1995 the plate mill was closed. Provisions
for such closure were taken prior to and in 1991.

  For the three years indicated, shipments by market classification of steel
mill products produced by the Company at its Indiana Harbor Works, including
shipments to affiliates of the Company, are set forth below. As shown in the
table, a substantial portion of shipments by the Flat Products division was to
steel service centers and transportation-related markets.

<TABLE>
<CAPTION>
                                                PERCENTAGE OF TOTAL TONNAGE
                                                    OF STEEL SHIPMENTS
                                               ---------------------------------
                                                 1997        1996        1995
                                               ---------   ---------   ---------
<S>                                            <C>         <C>         <C>
Steel Service Centers:
  Non-Affiliates..............................        25%         25%         25%
  Affiliates..................................         9          10           9
                                               ---------   ---------   ---------
                                                      34          35          34
Automotive....................................        29          27          28
Steel Converters/Processors...................        17          14          15
Appliance.....................................         9           9           8
Industrial, Electrical and Farm Machinery.....         7           8           8
Construction and Contractors' Products........         2           2           2
Other.........................................         2           5           5
                                               ---------   ---------   ---------
                                                     100%        100%        100%
                                               =========   =========   =========
</TABLE>


                                       2
<PAGE>

  Some value-added steel processing operations for which the Company does not
have facilities are performed by outside processors, including joint ventures,
prior to shipment of certain products to the Company's customers. In 1997,
approximately 43% of the products produced by the Company were processed
further through value-added services such as electrogalvanizing, painting and
slitting.

  Approximately 74% of the finished steel shipped to customers during 1997 was
transported by truck, with the remainder transported primarily by rail. A
wholly owned truck transport subsidiary of the Company was responsible for
shipment of approximately 10% of the total tonnage of products transported by
truck in 1997.

  Substantially all of the steel mill products produced by the Flat Products
division are marketed through its own selling organization, with offices
located in Chicago, Illinois; Southfield, Michigan; and Nashville, Tennessee.
Substantially all of the steel mill products produced by the Bar division are
marketed through its sales office in East Chicago, Indiana.

  See "Product Classes" below for information relating to the percentage of
consolidated net sales accounted for by certain classes of similar products of
steel manufacturing operations.

Raw Materials

  The Company obtains iron ore pellets primarily from three iron ore
properties, located in the United States and Canada, in which subsidiaries of
the Company have varying interests -- the Empire Mine in Michigan and the
Minorca Mine in Minnesota.

  During the second quarter of 1997, the Company completed the sale of its
interest in the Wabush Mines located in Labrador and Quebec, Canada. The
Company entered into a contract with the purchaser of such interest, effective
January 1, 1997 and expiring December 31, 2006, to sell to the Company, at
prices approximating market, any of the Company's iron ore pellet requirements
up to one million gross tons annually not met by the Company's equity sources.
See "Properties Relating to Operations--Raw Materials Properties and
Interests" in Item 2 below for further information relating to such iron ore
properties.

  The following table shows (1) the iron ore pellets available to the Company,
as of December 31, 1997, from properties of its subsidiaries and through
interests in raw materials ventures; (2) 1997 and 1996 iron ore pellet
production or purchases from such sources; and (3) the percentage of the
Company's iron ore requirements represented by production or purchases from
such sources in 1997 and 1996.

<TABLE>
<CAPTION>
                                       IRON ORE
                                 TONNAGES IN THOUSANDS          % OF
                                (GROSS TONS OF PELLETS)   REQUIREMENTS (1)
                              --------------------------- -------------------
                              AVAILABLE AS OF PRODUCTION
                               DECEMBER 31,   -----------
                                  1997(2)     1997  1996    1997       1996
                              --------------- ----- ----- --------   --------
<S>                           <C>             <C>   <C>   <C>        <C>
INLAND STEEL MINING COMPANY
 PROPERTY
Minorca--Virginia, MN........      57,000     2,583 2,735       35%        38%
IRON ORE VENTURES
Empire (40% owned)--Palmer,
 MI; Wabush (15.09% owned in
 1996)--Wabush, Labrador and
 Point Noire, Quebec,
 Canada(3)...................      68,000     3,389 4,034       45         55
                                  -------     ----- ----- --------   --------
    Total Iron Ore...........     125,000     5,972 6,769       80%        93%
                                  =======     ===== ===== ========   ========
</TABLE>
--------
(1) Requirements in excess of production are purchased or taken from
    stockpile.
(2) Net interest in proven reserves.
(3) Wabush Mines interest sold in the second quarter of 1997 and production is
    not included in 1997 amounts shown above.

                                       3
<PAGE>

  All of the Company's coal requirements are satisfied from independent
sources. In April 1996, the Company entered into a contract to purchase one
million tons of steam coal for the period of April 1, 1996 to December 31,
1997. The Company purchased 39% of its 1997 coal requirements under such
contract, representing 74% of its steam coal requirements. The balance of
steam coal requirements is being met through a short-term contract. In
connection with commencement of operations of the heat recovery coke battery
and associated energy facility discussed below, the Company's coal fired
generating station will be temporarily idled in the second quarter of 1998,
thereby eliminating steam coal requirements in the interim.

  The Company's other coal requirements are for the PCI Associates joint
venture, in which a subsidiary of the Company holds a 50% interest. The PCI
facility pulverizes coal for injection into the Company's blast furnaces.
During 1997, the PCI facility's coal needs were satisfied under a requirements
contract subject to a force majeure provision. This agreement continues in
1998.

  In December 1993, the last of the Company's cokemaking facilities was
permanently shut down. The Company has entered into three long-term purchase
contracts, one of which requires the purchase of 1 million tons of coke
between January 1, 1998 and December 31, 1999. The second contract requires
the purchase of 350,000 tons of coke annually for the period January 1, 1996
through December 31, 2000 on a take-or-pay basis, with a provision allowing
the Company to sell the coke to others. Both contract terms require purchases
on an annualized basis at prices negotiated annually based on certain market
determinants. During 1997, the Company satisfied 80% of its total coke needs
under such arrangements. The remainder of its purchased coke requirements was
obtained through contracts with independent domestic and foreign sources.
Under the third contract, the Company has committed to purchase, for
approximately 15 years, beginning approximately June 1998 when the heat
recovery coke battery (discussed below) is expected to reach full production,
1.2 million tons of coke annually on a take-or-pay basis at prices determined
by certain cost factors, as well as energy produced by the facility through
the tolling arrangement.

  In the 1996 fourth quarter, the Company reached an agreement with Sun Coal
and Coke Company and a unit of NIPSCO Industries for a heat recovery coke
battery and an associated energy recovery and flue-gas desulphurization
facility, to be located on land leased from the Company at its Indiana Harbor
Works. Sun designed, built, financed, and will operate the cokemaking portion
of the project. A unit of NIPSCO Industries designed, built, financed, and
will operate the portion of the project which will clean the coke plant's flue
gas and convert the heat into steam and electricity. Sun, the NIPSCO unit and
other third parties will invest approximately $350 million in the project. The
facility is designed to be the primary coke source for the largest blast
furnace at the Indiana Harbor Works and is expected to commence operations in
the first quarter of 1998. The Company also advanced $30 million during
construction of the project, which is recorded as a deferred asset on the
balance sheet and will be credited against required cash payments during the
second half of the energy tolling arrangement.

  The Company sold all of its limestone and dolomite properties in September
1990. The Company entered into a long-term contract with the buyer of the
properties to purchase, subject to certain exceptions and at prices which
approximate market, the full amount of the annual limestone needs of the
Indiana Harbor Works through 2002.

  Approximately 80% of the iron ore pellets and all of the limestone received
by the Company at its Indiana Harbor Works in 1997 were transported by its
Great Lakes carriers. Contracts are in effect for the transportation on the
Great Lakes of the remainder of its iron ore pellet requirements.
Approximately 25% of the Company's coal requirements were transported in its
hopper cars by unit train in 1997. The remainder of the Company's coal
requirements was transported in independent carrier-owned equipment or leased
equipment. Approximately 25% of the Company's coke requirements in 1997 were
transported in its own hopper cars, 47% in leased hopper cars, 8% in
independent carrier-owned hopper cars, and 20% in independent carrier-owned
river barges.

  See "Energy" below for further information relating to the use of coal in
the operations of the Company.

                                       4
<PAGE>

PRODUCT CLASSES

  The following table sets forth the percentage of consolidated net sales, for
the three years indicated, contributed by each class of similar products of
the Company that accounted for 10% or more of consolidated net sales in such
time period. The data includes sales to affiliates of the Company.

<TABLE>
<CAPTION>
                                                                 1997  1996  1995
                                                                 ----  ----  ----
      <S>                                                        <C>   <C>   <C>
      Sheet and Strip...........................................  81%   81%   82%
      Bar.......................................................  19    19    18
                                                                 ---   ---   ---
                                                                 100%  100%  100%
                                                                 ===   ===   ===
</TABLE>

  Sales to General Motors Corporation approximated less than 10% of
consolidated net sales in each of 1997 and 1996 and 10% in 1995. No other
customer accounted for more than 10% of the consolidated net sales of the
Company during any of these years.

CAPITAL EXPENDITURES AND INVESTMENTS IN JOINT VENTURES

  In recent years, the Company and its subsidiaries have made substantial
capital expenditures, principally at the Indiana Harbor Works, to improve
quality and reduce costs, and for pollution control. Additions by the Company
and its subsidiaries to property, plant and equipment, together with
retirements and adjustments, for the five years ended December 31, 1997, are
set forth below. Net capital additions during such period aggregated $417.9
million.

<TABLE>
<CAPTION>
                                                DOLLARS IN MILLIONS
                                   ---------------------------------------------
                                             RETIREMENTS             NET CAPITAL
                                   ADDITIONS  OR SALES   ADJUSTMENTS  ADDITIONS
                                   --------- ----------- ----------- -----------
      <S>                          <C>       <C>         <C>         <C>
      1997........................  $ 98.4     $ 40.8       $ 6.1      $ 63.7
      1996........................   155.8        8.5         5.6       152.9
      1995........................   113.9       36.7         1.5        78.7
      1994........................   223.7       47.8         2.0       177.9
      1993........................    86.1      140.2        (1.2)      (55.3)
</TABLE>

  In recent years, the Company's largest capital improvement projects at the
Indiana Harbor Works have emphasized reducing costs and improving quality in
the steel-processing sequence of the Company. The Company and its subsidiaries
made capital expenditures of $98 million in 1997. Such expenditures
principally related to the purchase of new machinery and equipment to maintain
or improve operations at the Indiana Harbor Works.

  In July 1987, a wholly owned subsidiary of the Company formed a partnership,
I/N Tek, with an indirect wholly owned subsidiary of NSC to construct, own,
finance and operate a cold-rolling facility with an annual capacity of
1,500,000 tons, of which approximately 40% is cold-rolled substrate for I/N
Kote (described below). The I/N Tek facility is located near New Carlisle,
Indiana. The Company, which owns, through its subsidiary, a 60% interest in
the I/N Tek partnership is, with certain limited exceptions, the sole supplier
of hot band to be processed by the I/N Tek facility and generally has
exclusive rights to the production capacity of the facility.

  In September 1989, a wholly owned subsidiary of the Company formed a second
partnership, I/N Kote, with an indirect wholly owned subsidiary of NSC to
construct, own, finance and operate two sheet steel galvanizing lines adjacent
to the I/N Tek facility. The subsidiary of the Company owns a 50% interest in
I/N Kote. The I/N Kote facility consists of a hot-dip galvanizing line and an
electrogalvanizing line with a combined annual capacity of 900,000 tons. The
Company has guaranteed 50% of I/N Kote's permanent financing. I/N Kote has
contracted to acquire its cold-rolled steel substrate from the Company, which
supplies the substrate from the I/N Tek facility and the Company's Indiana
Harbor Works.

                                       5
<PAGE>

  Further information regarding the I/N Tek and I/N Kote joint venture
projects will be set forth under the caption "Certain Relationships and
Related Transactions--Joint Ventures" in Industries' definitive Proxy
Statement which will be furnished to stockholders of Industries in connection
with its Annual Meeting scheduled to be held on May 27, 1998.

  The amount budgeted for 1998 capital expenditures by the Company and its
subsidiaries is approximately $110 million. It is anticipated that capital
expenditures will be funded from cash generated by operations and advances
from and capital contributions by Industries. (See "Environment" below for a
discussion of capital expenditures for pollution control purposes.)

EMPLOYEES

  The monthly average number of active employees of the Company and its
subsidiaries receiving pay during 1997 was approximately 8,900. At year-end,
approximately 6,900 employees were represented by the United Steelworkers of
America, of whom approximately 470 were on furlough or indefinite layoff.
Total employment costs decreased from $649 million in 1996 to $642 million in
1997, as lower employee benefit costs were in part offset by higher profit
sharing provisions.

  Beginning in 1991, the Company embarked upon a major turnaround strategy,
with the assistance of an outside consulting firm, to significantly reduce
costs, increase revenues and improve asset utilization at the Company. With
the closure of the plate operations at year-end 1995, the Company completed
the workforce reduction program which was part of the turnaround strategy,
reducing employment by 25%.

  The current labor agreement between the Company and the United Steelworkers
of America, effective August 1, 1993, covers wages and benefits through July
31, 1999. Among other things, the agreement provided a wage increase of $.50
per hour in 1995 and a $500 bonus in each of 1993 and 1994 (totalling in each
case approximately $4 million). All active employees received an additional
week of vacation in 1994 and in 1996. The agreement provided for a reopener on
wages and certain benefits in 1996 with an arbitration provision to resolve
unsettled issues, thereby precluding a work stoppage over the six-year term of
the contract. On September 17, 1996 an arbitrator issued a decision selecting
the Company's final offer of terms covering the second half of the six year
agreement. The terms provided a wage increase of $.50 per hour retroactive to
August 1, 1996 with increases of $.25 an hour in 1997 and 1998. A $1,000 lump
sum would be paid to active employees in each of the three remaining years of
the contract (totalling approximately $20 million). One additional holiday was
provided and retirement benefits were increased for active employees. The
agreement also provided for election of a union designee acceptable to
Industries' Board of Directors (Dr. Robert B. McKersie is such union
designee), restrictions on the ability of the Company to reduce the union
workforce (generally limited to attrition and major facilities shutdowns)
while allowing greater flexibility to institute work rule changes, quarterly
rather than annual payment of profit sharing amounts, significant improvements
in pension benefits for active employees, and the securing of retiree health
care obligations through certain trust and second mortgage arrangements.
"First dollar" health care coverage is eliminated under the agreement through
the institution of co-payments and increased deductibles on medical benefits.

ENVIRONMENT

  The Company is subject to environmental laws and regulations concerning
emissions into the air, discharges into ground water and waterways, and the
generation, handling, labeling, storage, transportation, treatment and
disposal of waste material. These include various federal statutes regulating
the discharge or release of pollutants to the environment, including the Clean
Air Act, Clean Water Act, Resource Conservation and Recovery Act,
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA," also known as "Superfund"), Safe Drinking Water Act, and Toxic
Substances Control Act, as well as state and local requirements. Violations of
these laws and regulations can give rise to a variety of civil,
administrative, and, in some cases, criminal actions and could also result in
substantial liabilities or require substantial capital

                                       6
<PAGE>

expenditures. In addition, under CERCLA the United States Environmental
Protection Agency (the "EPA") has authority to impose liability for site
remediation on waste generators, past and present site owners and operators,
and transporters, regardless of fault or the legality of the original disposal
activity. Liability under CERCLA is strict, joint and several.

  By year-end 1993, the last of the Company's cokemaking facilities was
permanently shut down. The Company has entered into three long-term contracts
to satisfy the majority of its coke needs. In November 1996, the Company
reached an agreement with Sun Coal and Coke Company and a unit of NIPSCO for a
heat recovery coke battery. (See "Raw Materials" above.) In addition, the
Company participates in a joint venture that has constructed and is operating
a pulverized coal injection facility for blast furnace application, reducing
the Company's coke needs by approximately 25%.

  Capital spending for pollution control projects totaled $7 million in 1997
and $19 million in 1996. Another $46 million was spent in 1997 to operate and
maintain such equipment, versus $44 million a year earlier. During the five
years ended December 31, 1997, the Company has spent $279 million to
construct, operate and maintain environmental control equipment at its various
locations.

  Environmental projects previously authorized and presently under
consideration, including those designed to comply with the 1990 Clean Air Act
Amendments, but excluding any amounts that would be required under the consent
decree settling the 1990 EPA lawsuit, will require capital expenditures of
approximately $4 million in 1998. It is anticipated that the Company will make
annual capital expenditures of $2 million to $5 million in each of the four
years thereafter. In addition, the Company will have ongoing annual
expenditures of $40 million to $50 million for the operation of air and water
pollution control facilities to comply with current federal, state and local
laws and regulations. Due to the inability to predict the costs of corrective
action that may be required under the Resource Conservation and Recovery Act
and the consent decree in the 1990 EPA lawsuit, the Company cannot predict the
amount of additional environmental expenditures that will be required. Such
additional environmental expenditures, excluding amounts that may be required
in connection with the consent decree in the 1990 EPA lawsuit, however, are
not expected to be material to the financial position or results of operations
of the Company.

  See Item 3 below for information concerning certain proceedings pertaining
to environmental matters in which the Company is involved.

ENERGY

  Coal, together with coke, all of which are purchased from independent
sources, accounted for approximately 76% of the energy consumed by the Company
at the Indiana Harbor Works in 1997.

  Natural gas and fuel oil supplied approximately 22% of the energy
requirements of the Indiana Harbor Works in 1997 and are used extensively by
the Company at other facilities that it owns or in which it has an interest.
Utilization of the pulverized coal injection facility (see "Environment"
above) has reduced natural gas and fuel oil consumption at the Indiana Harbor
Works.

  The Company both purchases and generates electricity to satisfy electrical
energy requirements at the Indiana Harbor Works. In 1997, the Company produced
approximately 59% of its electrical energy requirements at the Indiana Harbor
Works. The purchase of electricity at the Indiana Harbor Works is subject to
curtailment under rules of the local utility when necessary to maintain
appropriate service for various classes of its customers.

  A subsidiary of NIPSCO has leased land at the Indiana Harbor Works and built
a 75 megawatt steam turbine on such land. Pursuant to a 15-year toll-charge
contract between the Company and the NIPSCO subsidiary, the turbine facility
generates electricity for use by the Company utilizing steam produced by
burning waste blast furnace gas. The facility became operational in the first
half of 1996. During 1997, this facility produced 60% of the purchased
electricity requirements of the Indiana Harbor Works.

                                       7
<PAGE>

ITEM 2. PROPERTIES.

PROPERTIES RELATING TO OPERATIONS

 Steel Production

  All raw steel made by the Company is produced at its Indiana Harbor Works
located in East Chicago, Indiana. The property on which this plant is located,
consisting of approximately 1,900 acres, is held by the Company in fee. The
basic production facilities of the Company at its Indiana Harbor Works consist
of furnaces for making iron; basic oxygen and electric furnaces for making
steel; a continuous billet caster, a continuous combination slab/bloom caster
and two continuous slab casters; and a variety of rolling mills and processing
lines which turn out finished steel mill products. Certain of these production
facilities, including a continuous anneal line, are held by the Company under
leasing arrangements. The Company purchased the equity interest of the lessor
of the No. 2 BOF Shop Caster Facility in March 1994 and assumed caster-related
debt, which was repaid by year-end 1994. Substantially all of the remaining
property, plant and equipment at the Indiana Harbor Works, other than the
Caster Facility and leased equipment, is subject to the lien of the First
Mortgage of the Company dated April 1, 1928, as amended and supplemented. See
"Operations--Raw Steel Production and Mill Shipments" in Item 1 above for
further information relating to capacity and utilization of the Company's
properties. The Company's properties are adequate to serve its present and
anticipated needs, taking into account those issues discussed in "Capital
Expenditures and Investments in Joint Ventures" in Item 1 above.

  I/N Tek, a partnership in which a subsidiary of the Company owns a 60%
interest, has constructed a 1,500,000-ton annual capacity cold-rolling mill on
approximately 200 acres of land, which it owns in fee, located near New
Carlisle, Indiana. Substantially all the property, plant and equipment owned
by I/N Tek is subject to a lien securing related indebtedness. The I/N Tek
facility is adequate to serve the present and anticipated needs of the Company
planned for such facility.

  I/N Kote, a partnership in which a subsidiary of the Company owns a 50%
interest, has constructed a 900,000-ton annual capacity steel galvanizing
facility on approximately 25 acres of land, which it owns in fee, located
adjacent to the I/N Tek site. Substantially all the property, plant and
equipment owned by I/N Kote is subject to a lien securing related
indebtedness. The I/N Kote facility is adequate to serve the present and
anticipated needs of the Company planned for such facility.

  PCI Associates, a partnership in which a subsidiary of the Company owns a
50% interest, has constructed a pulverized coal injection facility on land
located within the Indiana Harbor Works. The Company leases PCI Associates the
land upon which the facility is located. Substantially all the property, plant
and equipment owned by PCI Associates is subject to a lien securing related
indebtedness. The PCI Associates facility is adequate to serve the present and
anticipated needs of the Company planned for such facility.

  See "Operations--Raw Materials" in Item 1 above for information relating to
the Sun and NIPSCO projects.

  The Company owns three vessels for the transportation of iron ore and
limestone on the Great Lakes, and a subsidiary of the Company owns a fleet of
404 coal hopper cars (100-ton capacity each) used in unit trains to move coal
and coke to the Indiana Harbor Works. See "Operations--Raw Materials" in Item
1 above for further information relating to utilization of the Company's
transportation equipment. Such equipment is adequate, when combined with
purchases of transportation services from independent sources, to meet the
Company's present and anticipated transportation needs.

  The Company also owns and maintains research and development laboratories in
East Chicago, Indiana, which facilities are adequate to serve its present and
anticipated needs.

 Raw Materials Properties and Interests

  Certain information relating to raw materials properties and interests of
the Company and its subsidiaries is set forth below. See "Operations--Raw
Materials" in Item 1 above for further information relating to capacity and
utilization of such properties and interests.

                                       8
<PAGE>

 Iron Ore

  The operating iron ore properties of the Company's subsidiaries and of the
iron ore ventures in which the Company has an interest are as follows:

<TABLE>
<CAPTION>
                                                                   ANNUAL
                                                             PRODUCTION CAPACITY
                                                              (IN THOUSANDS OF
                                                                GROSS TONS OF
      PROPERTY                                LOCATION            PELLETS)
      --------                                --------       -------------------
      <S>                                <C>                 <C>
      Empire Mine....................... Palmer, Michigan           8,100
      Minorca Mine...................... Virginia, Minnesota        2,700
</TABLE>

  The Empire Mine is operated by the Empire Iron Mining Partnership, in which
the Company has a 40% interest. The Company, through a subsidiary, is the sole
owner and operator of the Minorca Mine. The Company also owns a 38% interest
in the Butler Taconite project (permanently closed in 1985) in Nashwauk,
Minnesota. During the second quarter 1997, the Company completed the sale of
its 15% interest in the Wabash Mines.

  The reserves at the Empire Mine and Minorca Mine are held under leases
expiring, or expected at current production rates to expire, between 2012 and
2040. Substantially all of the reserves at Butler Taconite are held under
leases. The Company's share of the production capacity of its interests in
such iron ore properties is sufficient to provide the majority of its present
and anticipated iron ore pellet requirements. Any remaining requirements have
been and are expected to continue to be readily available from independent
sources.

 Coal

  The Company's sole remaining coal property, the Lancashire No. 25 Property,
located near Barnesboro, Pennsylvania, is permanently closed. All Company coal
requirements for the past several years have been and are expected to continue
to be met through contract purchases and other purchases from independent
sources.

OTHER PROPERTIES

  The Company and certain of its subsidiaries lease, under a long-term
arrangement, approximately 15% of the space in the Inland Steel Building
located at 30 West Monroe Street, Chicago, Illinois (where the Company's
principal executive offices are located), which property interest is adequate
to serve the Company's present and anticipated needs.

  Certain subsidiaries of the Company hold in fee at various locations an
aggregate of approximately 355 acres of land, all of which is for sale. The
Company also holds in fee approximately 300 acres of land adjacent to the I/N
Tek and I/N Kote sites, which land is available for future development.
Approximately 1,060 acres of rural land, which are held in fee at various
locations in the north-central United States by various raw materials
ventures, are also for sale.

ITEM 3. LEGAL PROCEEDINGS.

  On June 10, 1993, the U.S. District Court for the Northern District of
Indiana entered a consent decree that resolved all matters raised by a lawsuit
filed by the EPA in 1990. The consent decree includes a $3.5 million cash
fine, environmentally beneficial projects at the Indiana Harbor Works through
1997 costing approximately $7 million, and sediment remediation of portions of
the Indiana Harbor Ship Canal and Indiana Harbor Turning Basin estimated to
cost approximately $19 million over the next several years. The fine and
estimated remediation costs were provided for in 1991 and 1992. The Company's
reserve for environmental liabilities in connection with the consent decree
totaled $25 million at year-end 1997. The consent decree also defines
procedures for corrective action at the Company's Indiana Harbor Works. The
procedures defined establish essentially a three-step process, each step of
which requires agreement of the EPA before progressing to the next step in the
process, consisting of: assessment of the site (including stabilization
measures), evaluation of

                                       9
<PAGE>

corrective measures for remediating the site, and implementation of the
remediation plan according to the agreed-upon procedures. The Company is
presently assessing the extent of environmental contamination. The Company
anticipates that this assessment will cost approximately $2 million to $4
million per year over the next several years. Because neither the nature and
extent of the contamination nor the corrective actions can be determined until
the assessment of environmental contamination and evaluation of corrective
measures is completed, the Company cannot presently reasonably estimate the
costs of or the time required to complete such corrective actions. Such
corrective actions may, however, require significant expenditures over the
next several years that may be material to the financial position and results
of operations of the Company. Insurance coverage with respect to such
corrective actions is not significant.

  On March 22, 1985, the EPA issued an administrative order to the Company's
former Inland Steel Container Company Division ("Division") naming the former
Division and various other unrelated companies as responsible parties under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") in connection with the cleanup of a waste disposal facility
operated by Duane Marine Salvage Corporation at Perth Amboy, New Jersey. The
administrative order alleged that certain of the former Division's wastes were
transported to, and disposed of at, that facility and required the Company to
join with other named parties in taking certain actions relating to the
facility. The Company and the other administrative order recipients have
completed the work required by the order. In unrelated matters, the EPA also
advised the former Division and various other unrelated parties of other sites
located in New Jersey at which the EPA expects to spend public funds on any
investigative and corrective measures that may be necessary to control any
releases or threatened releases of hazardous substances, pollutants and
contaminants pursuant to the applicable provisions of CERCLA. The notice also
indicated that the EPA believes the Company may be a responsible party under
CERCLA. The extent of the Company's involvement and participation in these
matters has not yet been determined. While it is not possible at this time to
predict the amount of the Company's potential liability, none of these matters
is expected to materially affect the Company's financial position. Results of
operations could be materially affected for the particular reporting periods
in which expenses are incurred.

  On March 29, 1996, the EPA filed a lawsuit against the Company in the U.S.
District Court for the Northern District of Indiana for alleged violations of
effluent limits contained in its National Pollution Discharge Elimination
Systems ("NPDES") permit and for the alleged discharge of pollutants without
the authorization of an NPDES permit. On December 17, 1997, the Court entered
a consent decree that resolved all matters raised by this lawsuit. The consent
decree includes a $150,000 cash fine and an environmentally beneficial project
at the Indiana Harbor Works costing approximately $350,000.

  The EPA has adopted a national policy of seeking substantial civil penalties
against owners and operators of sources for noncompliance with air and water
pollution control statutes and regulations under certain circumstances. It is
not possible to predict whether further proceedings will be instituted against
the Company or any of its subsidiaries pursuant to such policy, nor is it
possible to predict the amount of any such penalties that might be assessed in
any such proceeding.

  The Company received a Special Notice of Potential Liability ("Special
Notice") from Indiana Department of Environmental Management ("IDEM") on
February 18, 1992 relating to the Four County Landfill Site, Fulton County,
Indiana (the "Facility"). The Special Notice stated that IDEM has documented
the release of hazardous substances, pollutants and contaminants at the
Facility and was planning to spend public funds to undertake an investigation
and control the release or threatened release at the Facility unless IDEM
determined that a potentially responsible party ("PRP") will properly and
promptly perform such action. The Special Notice further stated that the
Company may be a PRP and that the Company, as a PRP, may have potential
liability with respect to the Facility. In August 1993, the Company, along
with other PRPs, entered into an Agreed Order with IDEM pursuant to which the
PRPs agreed to perform a Remedial Investigation/Feasibility Study ("RI/FS")
for the Facility and pay certain past and future IDEM costs. In addition, the
PRPs agreed to provide funds for operation and maintenance necessary for
stabilization of the Facility. The costs which the Company has agreed to
assume under the Agreed Order are not currently anticipated to exceed
$300,000. The cost of the final

                                      10
<PAGE>

remedies which will be determined to be required with respect to the Facility
cannot be reasonably estimated until, at a minimum, the RI/FS is completed.
The Company is therefore unable to determine the extent of its potential
liability, if any, relating to the Facility or whether this matter could
materially affect the Company's financial position or results of operations.

  In October 1996, the Company received a notification from IDEM, as lead
administrative trustee, that the natural resource trustees (which also include
the Indiana Department of Natural Resources, the U.S. Department of the
Interior, Fish and Wildlife Service and the National Park Service) intend to
perform a natural resource damage assessment on the Grand Calumet River and
Indiana Harbor Canal system. The notification further states that the Company
has been identified as a PRP in connection with the release of hazardous
substances and oil and the subsequent damages resulting from natural resource
injury. Because of the preliminary nature of this matter, it is not possible
at this time to predict the amount of the Company's potential liability or
whether such potential liability could materially affect the Company's
financial position.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.

  The Company meets the conditions set forth in General Instruction J(1)(a)
and (b) of Form 10-K and is therefore omitting, pursuant to General
Instruction J(2), the information called for by this Item.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

  The Company is a wholly owned subsidiary of Inland Steel Industries, Inc.
thus, market, stockholder and dividend information otherwise called for by
this Item is omitted.

ITEM 6. SELECTED FINANCIAL DATA.

  The Company meets the conditions set forth in General Instruction J(2)(a)
and (b) of Form 10-K and is therefore omitting, pursuant to General
Instruction J(2), the information called for by this Item.

ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS.

  The Company reported net income of $54.8 million in 1997 as compared with a
net loss of $17.9 million in 1996. Included in the 1996 loss was an
extraordinary after-tax loss of approximately $8.8 million, $13.6 million
before income taxes, as a result of the following two redemptions. During the
1996 third quarter, the Company made a tender offer for the repurchase of the
entire $125 million principal amount of its Series T First Mortgage Bonds
outstanding, of which $98.7 million was tendered. The Company also refinanced
$38 million of 10 percent pollution control bonds with bonds bearing a rate of
7.25 percent.

  The following table summarizes selected earnings and other data:

<TABLE>
<CAPTION>
                                                                1997     1996
                                                              -------- --------
                                                              DOLLARS AND TONS
                                                                 IN MILLIONS
      <S>                                                     <C>      <C>
      Net sales.............................................. $2,467.5 $2,397.3
      Operating profit.......................................    143.8     48.0
      Net income (loss)......................................     54.8    (17.9)
      Net tons shipped.......................................      5.3      5.1
</TABLE>

  The Company reported markedly improved operating profit of $143.8 million in
1997 as compared with $48 million in 1996. The major factors in the year-to-
year improvement were an improved cost structure and higher volume. Net sales
increased 3 percent due entirely to an increase in the volume of steel mill
products

                                      11
<PAGE>

shipped as average selling price remained virtually unchanged. Operating
profit was negatively impacted in 1997 by $1 million, representing the net
effect of a $10 million adjustment to provisions for previously discontinued
raw material operations primarily related to retiree health care and other
benefit costs, which was offset in part by a $9 million gain on the sale of
the Company's interest in the Wabush iron ore property. Operating profit was
negatively impacted in 1996 by a $26 million salaried workforce reduction
provision.

  The Company continued to effect improvements in operations during 1997 as it
did during 1996. Raw steel tons produced increased to 5.8 million tons in 1997
from 5.5 million tons in 1996 reflecting the 4.9 percentage point year-over-
year improvement in capability utilization. The Company operated at 97 percent
of its raw steelmaking capability in 1997 as compared with 92 percent in 1996.
Increases were also achieved in both the percentage of raw steel that was
produced into prime product and in prime product shipments. The combined
effect of these improvements, as well as productivity and other cost
improvements, resulted in the enhanced operating performance compared with
1996.

  The Company, under the I/N Kote partnership agreement, supplies all of the
steel for the joint venture and, with certain limited exceptions, is required
to set the price of that steel to assure that I/N Kote's expenditures do not
exceed its revenues. Since 1993, the Company's sales prices exceeded its costs
of production but were less than the market prices for cold rolled steel
products. Because I/N Kote expenditures include principal payments and a
provision for return on equity to the partners, the Company's ability to
realize higher prices on its sales to I/N Kote depends on the facility
continuing near-capacity operations and obtaining appropriate pricing for its
products.

  In the 1996 fourth quarter, the Company reached an agreement with Sun Coal
and Coke Company and a unit of NIPSCO Industries for a heat recovery coke
battery and an associated energy recovery and flue-gas desulphurization
facility, to be located on land leased from the Company at its Indiana Harbor
Works. Sun designed, built, financed, and will operate the cokemaking portion
of the project. A unit of NIPSCO Industries designed, built, financed, and
will operate the portion of the project which will clean the coke plant's flue
gas and convert the heat into steam and electricity. Sun, the NIPSCO unit and
other third parties will invest approximately $350 million in the project. The
Company has committed to purchase, for approximately 15 years, beginning
approximately June 1998 when the facility is expected to reach full
production, 1.2 million tons of coke annually from the facility on a take-or-
pay basis, as well as energy produced by the facility through a tolling
arrangement. The facility is designed to be the primary coke source for the
largest blast furnace at the Indiana Harbor Works and is expected to commence
operations in the first quarter of 1998. The Company also advanced $30 million
during construction of the project, which is recorded as a deferred asset on
the balance sheet and will be credited against required cash payments during
the second half of the energy tolling arrangement.

RECENT DEVELOPMENTS

  On March 17, 1998, Industries announced it had signed a binding letter
agreement with Ispat International N.V. ("Ispat") whereby Ispat will acquire
the Company for a total transaction value of approximately $1.43 billion. The
agreement has been approved by the Boards of Directors of both Industries and
Ispat. As part of the $1.43 billion transaction, Ispat will: i) pay $650
million in cash for the common stock of the Company held by Industries; ii)
pay $238.2 million for the preferred stock of the Company held by Industries;
iii) repay the intercompany debt of the Company owed to Industries, which at
December 31, 1997, was $230.7 million; and iv) assume debt owed to third
parties of approximately $307.9 million. The sale is subject to a definitive
agreement, antitrust clearance, other closing conditions, and the need to give
the United Steelworkers of America the opportunity to make an offer to
purchase the Company. It is anticipated that the transaction will close in the
third quarter of 1998.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

  The consolidated financial statements (including the financial statement
schedules listed under Item 14(a)1 of this report) of the Company called for
by this Item, together with the Report of Independent Accountants dated
February 18, 1998, are set forth on pages F-2 to F-19 inclusive, of this
Report on Form 10-K, and are

                                      12
<PAGE>

hereby incorporated by reference into this Item. Financial statement schedules
not included in this Report on Form 10-K have been omitted because they are
not applicable or because the information called for is shown in the
consolidated financial statements or notes thereto.

  Consolidated quarterly sales and earnings information for 1997 and 1996 is
set forth in Note 15 of Notes to Consolidated Financial Statements (contained
herein), which is hereby incorporated by reference into this Item.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

  None.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

  The Company meets the conditions set forth in General Instruction J(1)(a)
and (b) of Form 10-K and is therefore omitting, pursuant to General
Instruction J(2), the information called for by this Item.

ITEM 11. EXECUTIVE COMPENSATION.

  The Company meets the conditions set forth in General Instruction J(1)(a)
and (b) of Form 10-K and is therefore omitting, pursuant to General
Instruction J(2), the information called for by this Item.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

  The Company meets the conditions set forth in General Instruction J(1)(a)
and (b) of Form 10-K and is therefore omitting, pursuant to General
Instruction J(2), the information called for by this Item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

  The Company meets the conditions set forth in General Instruction J(1)(a)
and (b) of Form 10-K and is therefore omitting, pursuant to General
Instruction J(2), the information called for by this Item.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

  (A)DOCUMENTS FILED AS A PART OF THIS REPORT.

    1. CONSOLIDATED FINANCIAL STATEMENTS. The consolidated financial
      statements listed below are set forth on pages F-2 to F-19 inclusive,
      of this Report and are incorporated by reference in Item 8 of this
      Annual Report on Form 10-K.

      Report of Independent Accountants.

              Consolidated Statements of Operations and Reinvested Earnings
              for the three years ended December 31, 1997.

              Consolidated Statement of Cash Flows for the three years ended
              December 31, 1997.

              Consolidated Balance Sheet at December 31, 1997 and 1996.

              Schedules to Consolidated Financial Statements at December 31,
              1997 and 1996, relating to:

                 Property, Plant and Equipment.

                 Long-Term Debt.

              Statement of Accounting and Financial Policies.

              Notes to Consolidated Financial Statements.

              Financial Statement Schedule II (Reserves) for the three years
              ended December 31, 1997.

    2. EXHIBITS. The exhibits required to be filed by Item 601 of
      Regulation S-K are listed in the "Exhibit Index," which is attached
      hereto and incorporated by reference herein.

  (B) REPORTS ON FORM 8-K.

    No reports on Form 8-K were filed by the Company during the quarter
    ended December 31, 1997.

                                      13
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          Inland Steel Company

                                                     Robert J. Darnall
Date: March 30, 1998                      By: _________________________________
                                                     Robert J. Darnall
                                               Chairman and Chief Executive
                                                          Officer
                                               (Principal Executive Officer)

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              SIGNATURE                           TITLE                          DATE
              ---------                           -----                          ----


 <C>                                  <S>                             <C>
          Robert J. Darnall            Chairman and Chief Executive         March 30, 1998
 ____________________________________      Officer and Director
          Robert J. Darnall           (Principal Executive Officer)

           Cynthia C. Heath              Vice President--Finance            March 30, 1998
 ____________________________________      and Purchasing, and
           Cynthia C. Heath                     Controller
                                      (Principal Financial Officer)


           A. Robert Abboud                      Director

          James A. Henderson                     Director

          Robert B. McKersie                     Director


            Leo F. Mullin                        Director
                                                           By: Cynthia C. Heath
                                                           -------------------------------
                                                             Cynthia C. Heath
                                                             Attorney-in-fact
                                                              March 30, 1998

          Jean-Pierre Rosso                      Director

           Joshua I. Smith                       Director

           Nancy H. Teeters                      Director

           Arnold R. Weber                       Director
</TABLE>


                                      14
<PAGE>

                                     INDEX
                                       TO
                       CONSOLIDATED FINANCIAL STATEMENTS
                                       OF
                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
          (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

<TABLE>
<CAPTION>
                                   ITEM                                    PAGE
                                   ----                                    ----
<S>                                                                        <C>
Report of Independent Accountants......................................... F-2
Consolidated Statements of Operations and Reinvested Earnings for the
 three years ended December 31, 1997...................................... F-3
Consolidated Statement of Cash Flows for the three years ended December
 31, 1997................................................................. F-4
Consolidated Balance Sheet at December 31, 1997 and 1996.................. F-5
Schedules to Consolidated Financial Statements at December 31, 1997 and
 1996, relating to Property, Plant and Equipment, and Long-Term Debt...... F-6
Statement of Accounting and Financial Policies............................ F-7
Notes to Consolidated Financial Statements................................ F-8
Financial Statement Schedule II (Reserves) for the three years ended
 December 31, 1997........................................................ F-19
</TABLE>


                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholder of
Inland Steel Company

  In our opinion, the consolidated financial statements listed in the index
appearing on page F-1 present fairly, in all material respects, the financial
position of Inland Steel Company (a wholly owned subsidiary of Inland Steel
Industries, Inc.) and Subsidiary Companies at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

                                          Price Waterhouse LLP

Chicago, Illinois
February 18, 1998, except as to Note 16, which is as of March 17, 1998

                                      F-2
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
          (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

         CONSOLIDATED STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31
                                                ------------------------------
                                                  1997      1996        1995
                                                --------  --------    --------
                                                   DOLLARS IN MILLIONS
<S>                                             <C>       <C>         <C>
CONSOLIDATED STATEMENT OF OPERATIONS
  Net sales.................................... $2,467.5  $2,397.3    $2,513.3
                                                --------  --------    --------
  Operating costs and expenses:
    Cost of goods sold (excluding
     depreciation).............................  2,089.7   2,105.3     2,112.9
    Selling, general and administrative
     expenses..................................     40.5      42.3        42.9
    Depreciation...............................    133.0     124.6       121.2
    State, local and miscellaneous taxes.......     60.5      50.8        54.6
    Workforce reduction provision (Note 7).....      --       26.3         --
                                                --------  --------    --------
      Total....................................  2,323.7   2,349.3     2,331.6
                                                --------  --------    --------
  Operating profit ............................    143.8      48.0       181.7
  Other expense:
    General corporate expense, net of income
     items.....................................     14.7      12.4        17.8
    Interest and other expense on debt.........     40.6      48.2        52.6
                                                --------  --------    --------
  Income (loss) before income taxes and
   extraordinary loss..........................     88.5     (12.6)      111.3
  Provision for income taxes (Note 9)..........     33.7       3.5Cr.     42.2
                                                --------  --------    --------
  Income (loss) before extraordinary loss......     54.8      (9.1)       69.1
  Extraordinary loss on early retirement of
   debt........................................      --       (8.8)        --
                                                --------  --------    --------
      Net income (loss)........................ $   54.8  $  (17.9)   $   69.1
                                                ========  ========    ========
  Cr. = Credit
CONSOLIDATED STATEMENT OF
REINVESTED EARNINGS
  Accumulated deficit at beginning of year..... $ (983.7) $ (949.5)   $ (992.7)
  Net income (loss) for the year...............     54.8     (17.9)       69.1
  Impact of pension plan split (Note 8)........      --        9.5         --
  Preferred dividends declared.................    (25.9)    (25.8)      (25.9)
                                                --------  --------    --------
  Accumulated deficit at end of year........... $ (954.8) $ (983.7)   $ (949.5)
                                                ========  ========    ========
</TABLE>


                See Notes to Consolidated Financial Statements.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                      F-3
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
          (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

                      CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                INCREASE (DECREASE) IN CASH
                                                  YEARS ENDED DECEMBER 31
                                               -------------------------------
                                                 1997       1996       1995
                                               ---------  ---------  ---------
                                                    DOLLARS IN MILLIONS
<S>                                            <C>        <C>        <C>
OPERATING ACTIVITIES
  Net income (loss)........................... $    54.8  $   (17.9) $    69.1
                                               ---------  ---------  ---------
  Adjustments to reconcile net income (loss)
   to net cash provided from operating
   activities:
    Depreciation..............................     133.0      124.6      121.2
    Deferred employee benefit cost............     (15.8)      18.1     (109.4)
    Deferred income taxes.....................      47.2       19.3       72.7
    Workforce reduction provision.............       --        26.3        --
    Cokemaking project advance................     (30.0)       --         --
    Gain on sale of Wabush Mines (Note 11)....      (9.0)       --         --
    Change in:
      Receivables.............................       6.4       15.7       33.1
      Inventories.............................     (18.5)      16.6      (41.7)
      Accounts payable........................      21.2       (5.7)     (18.1)
      Payables to related companies (other)...      (3.9)       (.4)      (3.6)
      Receivables from related companies
       (other)................................      (5.8)       --         --
      Accrued salaries and wages..............        .5      (11.7)      (3.3)
      Other accrued liabilities...............       (.7)     (22.7)      26.7
    Other items...............................     (44.3)     (40.7)     (26.8)
                                               ---------  ---------  ---------
      Net adjustments.........................      80.3      139.4       50.8
                                               ---------  ---------  ---------
      Net cash provided from operating
       activities.............................     135.1      121.5      119.9
                                               ---------  ---------  ---------
INVESTING ACTIVITIES
  Capital expenditures........................     (98.4)    (155.8)    (113.9)
  Investments in and advances to joint
   ventures, net..............................      23.4       23.4       26.5
  Proceeds from sales of assets...............      16.1        3.9        1.7
                                               ---------  ---------  ---------
      Net cash used for investing activities..     (58.9)    (128.5)     (85.7)
                                               ---------  ---------  ---------
FINANCING ACTIVITIES
  Long-term debt issued.......................      51.3       42.2       16.8
  Long-term debt retired......................     (59.8)    (144.5)     (23.5)
  Change in notes payable to related
   companies..................................     (41.8)     135.1       (1.6)
  Dividends paid..............................     (25.9)     (25.8)     (25.9)
                                               ---------  ---------  ---------
      Net cash provided from (used for)
       financing activities...................     (76.2)       7.0      (34.2)
                                               ---------  ---------  ---------
  Net change in cash and cash equivalents.....       --         --         --
  Cash and cash equivalents--beginning of
   year.......................................       --         --         --
                                               ---------  ---------  ---------
  Cash and cash equivalents--end of year...... $     --   $     --   $     --
                                               =========  =========  =========
SUPPLEMENTAL DISCLOSURES
  Cash paid (received) during the year for:
    Interest (net of amount capitalized)...... $    40.3  $    47.3  $    50.7
    Income taxes, net.........................     (11.7)     (30.3)     (30.4)
</TABLE>

                See Notes to Consolidated Financial Statements.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                      F-4
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
          (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

                           CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              AT DECEMBER 31
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
                                                                DOLLARS IN
                                                                 MILLIONS
<S>                                                          <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents................................  $    --   $    --
  Receivables less provision for allowances, claims and
   doubtful accounts of $16.1 and $17.9, respectively......     219.2     225.6
  Receivables from related companies.......................       5.8       --
  Inventories (Note 1).....................................     200.5     182.0
  Deferred income taxes (Note 9)...........................      24.9      18.6
                                                             --------  --------
      Total current assets.................................     450.4     426.2
Investments in and advances to joint ventures..............     234.0     221.4
Property, plant and equipment, at cost, less accumulated
 depreciation (see details page F-6).......................   1,340.4   1,368.7
Prepaid pension cost (Note 8)..............................      60.5      38.5
Deferred income taxes (Note 9).............................     194.9     248.4
Deferred charges and other assets..........................      52.9      19.6
                                                             --------  --------
      Total assets.........................................  $2,333.1  $2,322.8
                                                             ========  ========
LIABILITIES
Current liabilities:
  Accounts payable.........................................  $  238.9  $  217.7
  Payables to related companies:
    Notes..................................................     230.7     272.5
    Other..................................................       --        3.9
  Accrued liabilities:
    Salaries, wages and commissions........................      53.2      52.7
    Taxes..................................................      74.3      69.2
    Interest on debt.......................................       5.2       5.3
    Terminated facilities costs and other (Note 7).........       9.6      15.3
  Long-term debt due within one year.......................      45.9       7.7
                                                             --------  --------
      Total current liabilities............................     657.8     644.3
Long-term debt (see details page F-6 and Note 3)...........     262.0     307.9
Allowance for terminated facilities costs and other (Note
 7)........................................................      49.6      40.9
Deferred employee benefits (Note 8)........................   1,116.3   1,110.1
Deferred income and other..................................       7.7       8.8
                                                             --------  --------
      Total liabilities....................................   2,093.4   2,112.0
                                                             --------  --------
STOCKHOLDER'S EQUITY
Preferred stock, $1.00 par value, 500 shares authorized for
 all series, 110 shares issued and outstanding, aggregate
 liquidation value $238.2 (Note 4).........................       --        --
Common stock, 2,000 shares, $1.00 par value, authorized,
 980 shares issued and outstanding.........................       --        --
Additional paid-in capital.................................   1,194.5   1,194.5
Accumulated deficit........................................    (954.8)   (983.7)
                                                             --------  --------
      Total stockholder's equity...........................     239.7     210.8
                                                             --------  --------
      Total liabilities and stockholder's equity...........  $2,333.1  $2,322.8
                                                             ========  ========
</TABLE>

                See Notes to Consolidated Financial Statements.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                      F-5
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
          (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

                 SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               AT DECEMBER 31
                                                              -----------------
                                                                1997     1996
                                                              -------- --------
                                                                 DOLLARS IN
                                                                  MILLIONS
<S>                                                           <C>      <C>
PROPERTY, PLANT AND EQUIPMENT:
  Land, land improvements and mineral properties............. $  123.9 $  123.6
  Buildings, machinery and equipment.........................  3,776.3  3,713.7
  Transportation equipment...................................    138.2    137.4
  Property under capital leases--primarily machinery and
   equipment.................................................     36.7     36.7
                                                              -------- --------
      Total..................................................  4,075.1  4,011.4
  Less--
  Accumulated depreciation...................................  2,598.6  2,506.8
  Accumulated depreciation--capital leases...................     35.4     35.2
  Allowance for retirements and terminated facilities........    100.7    100.7
                                                              -------- --------
      Net.................................................... $1,340.4 $1,368.7
                                                              ======== ========
LONG-TERM DEBT:
  First Mortgage Bonds:
    Series R, 7.9% due January 15, 2007...................... $   61.4 $   72.0
    Series T, 12% due December 1, 1998.......................      --      26.3
    Pollution Control Series 1977, 5 3/4% due February 1,
     2007....................................................     25.5     26.5
    Pollution Control Series 1978, 6 1/2%....................      --      52.0
    Pollution Control Series 1993, 6.8% due June 1, 2013.....     40.0     40.0
    Pollution Control Series 1995, 6.85% due December 1,
     2012....................................................     17.0     17.0
                                                              -------- --------
      Total First Mortgage Bonds.............................    143.9    233.8
  Obligations for Industrial Development Revenue Bonds:
    Pollution Control Project No. 2, 5.9% due August 1, 1998.      --       5.0
    Pollution Control Project No. 3, 6 1/4% due April 1,
     1999....................................................      3.0      6.0
    Pollution Control Project No. 11, 7 1/8% due June 1,
     2007....................................................     20.0     20.0
    Pollution Control Project No. 13, 7 1/4% due November 1,
     2011....................................................     38.0     38.0
    Exempt Facilities Project No. 14, 6.7% due November 1,
     2012....................................................      5.1      5.1
    Exempt Facilities Project No. 15, 5 3/4% due October 1,
     2011....................................................     52.0      --
                                                              -------- --------
      Total long-term debt................................... $  262.0 $  307.9
                                                              ======== ========
</TABLE>

                See Notes to Consolidated Financial Statements.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                      F-6
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

                STATEMENT OF ACCOUNTING AND FINANCIAL POLICIES
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

  The following briefly describes the Company's principal accounting and
financial policies.

ACCOUNTING FOR EQUITY INVESTMENTS

  The Company's investments in less than majority-owned companies, joint
ventures and partnerships, and the Company's majority interest in the I/N Tek
partnership, are accounted for under the equity method.

INVENTORY VALUATION

  Inventories are valued at cost which is not in excess of market. Cost is
determined by the last-in, first-out method except for supply inventories,
which are determined by the average cost or first-in, first-out methods.

PROPERTY, PLANT AND EQUIPMENT

  Property, plant and equipment is depreciated for financial reporting
purposes over the estimated useful lives of the assets. Steelmaking machinery
and equipment, a significant class of assets, is depreciated on a production-
variable method, which adjusts straight-line depreciation to reflect
production levels at the steel plant. The adjustment is limited to not more
than a 25% increase or decrease from straight-line depreciation. Blast furnace
relining expenditures are capitalized and amortized on a unit-of-production
method over the life of the lining. All other assets are depreciated on a
straight-line method.

  Expenditures for normal repairs and maintenance are charged to income as
incurred.

  Gains or losses from significant abnormal disposals or retirements of
properties are credited or charged to income. The cost of other retired assets
less any sales proceeds is charged to accumulated depreciation.

CASH EQUIVALENTS

  Cash equivalents reflected in the Statement of Cash Flows are highly liquid,
short-term investments with maturities of three months or less. Cash
management activities are performed by the Company's parent, Inland Steel
Industries, Inc. ("Industries"), and periodic cash transfers are made, thereby
minimizing the level of cash maintained by the Company.

STOCK BASED COMPENSATION

  Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company, which participates in Industries' stock compensation
plans, has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of Industries' stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Compensation cost for stock appreciation rights and performance equity units
is recorded annually based on the quoted market price of Industries' stock at
the end of the period.

USE OF ESTIMATES

  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Changes in such
estimates may affect amounts reported in future periods.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                      F-7
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

NOTE 1/INVENTORIES

  Inventories were classified on December 31 as follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                                  -------------
                                                                   1997   1996
                                                                  ------ ------
                                                                   DOLLARS IN
                                                                    MILLIONS
      <S>                                                         <C>    <C>
      In process and finished steel.............................. $120.9 $106.5
                                                                  ------ ------
      Raw materials and supplies:
        Iron ore.................................................   39.7   42.4
        Scrap and other raw materials............................   23.7   16.4
        Supplies.................................................   16.2   16.7
                                                                  ------ ------
                                                                    79.6   75.5
                                                                  ------ ------
          Total.................................................. $200.5 $182.0
                                                                  ====== ======
</TABLE>

  Replacement costs for the LIFO inventories exceeded LIFO values by
approximately $274 million and $279 million on December 31, 1997 and 1996,
respectively. The effect on cost of goods sold of LIFO liquidations in each of
the three years ended December 31, 1997 was not material.

NOTE 2/BORROWING ARRANGEMENTS

  Inland Steel Administrative Service Company, a wholly owned subsidiary of
the Company established to provide a supplemental source of short-term funds
to the Company, has a $125 million revolving credit facility with a group of
banks which extends to November 30, 2000. Under this arrangement the Company
has agreed to sell substantially all of its receivables to Inland Steel
Administrative Service Company to secure this facility. The facility requires
the maintenance of various financial ratios including minimum net worth and
leverage ratios.

NOTE 3/LONG-TERM DEBT

  The outstanding First Mortgage Bonds of Inland Steel Company are the
obligation solely of the Company and have not been guaranteed or assumed by,
or otherwise become the obligation of Industries or any of its other
subsidiaries. Each series of First Mortgage Bonds issued by the Company is
limited to the principal amount outstanding, with the Pollution Control Series
1977 Bonds and the Series R First Mortgage Bonds subject to a sinking fund. A
substantial portion of the property, plant and equipment owned by the Company
at its Indiana Harbor Works is subject to the lien of the First Mortgage. This
property had a net book value of approximately $1.0 billion on December 31,
1997.

  During the 1997 fourth quarter, the Company refinanced $52 million of 6.5%
pollution control revenue bonds with 5.75% tax-exempt refunding bonds.

  During 1996, the Company tendered for the repurchase of all outstanding
Series T 12% First Mortgage Bonds. Of the $125 million principal amount of
Series T Bonds outstanding, $98.7 million was tendered. The Company also
called $38 million of 10% Pollution Control Project No. 9 Bonds for early
redemption, which were refinanced at an interest rate of 7.25%. As a result of
the tenders and early redemption, the Company recognized an extraordinary
after-tax loss of $8.8 million, $13.6 million before income taxes.


-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                      F-8
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

  During the third quarter of 1995, the Company refinanced $17 million of
10.75% pollution control revenue bonds with bonds bearing an interest rate of
6.85%.

  Maturities of long-term debt and capitalized lease obligations due within
five years are: $45.9 million in 1998, $4.0 million in 1999, $6.3 million in
2000, $6.3 million in 2001, and $6.3 million in 2002. See Note 12 regarding
commitments and contingencies for other scheduled payments.

  Interest cost incurred by the Company totaled $42.3 million in 1997, $50.7
million in 1996, and $54.4 million in 1995. Included in these totals is
capitalized interest of $1.7 million in 1997, $2.5 million in 1996, and $1.8
million in 1995.

NOTE 4/CAPITAL STOCK

  Cash dividends on Series A Preferred Stock, 10 shares issued and
outstanding, are cumulative and payable quarterly at an annual rate of $72,000
per share. The shares are convertible into common stock at the rate of one
share of common stock for each preferred share, and have a liquidation value
of $1,320,000 per share plus any accrued and unpaid dividend. The shares are
redeemable, at the Company's option, for $1,320,000 per share plus any accrued
and unpaid dividends.

  Cash dividends on Series B Preferred Stock, 50 shares issued and
outstanding, are cumulative and payable quarterly at an annual rate of
$142,500 per share. The shares are convertible into common stock at a
conversion price of $1,128,750 per share, or 1.33 common shares for each
preferred share, and have a liquidation value of $1,500,000 per share plus any
accrued and unpaid dividends. The shares are redeemable at the Company's
option, for $1,500,000 per share plus any accrued and unpaid dividends.

  Cash dividends on Series C Preferred Stock, 50 shares issued and
outstanding, are cumulative and payable quarterly at an annual rate of
$360,000 per share. The shares have a liquidation value of $3,000,000 per
share plus any accrued and unpaid dividends. The shares are redeemable at the
Company's option at a price (plus accrued and unpaid dividends) declining from
$3,252,000 for the one-year period commencing December 1, 1997 to $3,000,000
beginning December 1, 2011. The Series C Preferred Stock is also exchangeable
at the Company's option on any dividend payment date for the Company's 12%
subordinated debentures due December 1, 2016, at a rate of $3,000,000
principal amount of debentures for each share of Series C Preferred Stock.

NOTE 5/STOCK OPTION PLANS

  The Company has adopted the disclosure-only provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock option plans. Had compensation cost for
the option plans been determined based on the fair value at the grant date for
awards in 1997, 1996 and 1995 consistent with the provisions of FASB Statement
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                            1997   1996   1995
                                                            ----- ------  -----
                                                                DOLLARS IN
                                                                 MILLIONS
      <S>                                                   <C>   <C>     <C>
      Net income (loss)--as reported....................... $54.8 $(17.9) $69.1
      Net income (loss)--pro forma.........................  52.9  (20.0)  68.5
</TABLE>

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                      F-9
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------


  The fair value of each option grant of Industries stock is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997: dividend yield of 1.00%;
expected volatility of 32.67%; risk-free interest rate of 6.63%; and expected
term of 5 years.

  Company employees participate in the Industries employee stock purchase plan
where employees have the opportunity to sign up twice a year to purchase stock
at the end of each six month period at a price that is 90 percent of the fair
market value price on the last day of the period. In 1997, 1996 and 1995,
Company employees received Industries stock with a total value that was
approximately $80,000, $90,000 and $90,000, respectively, greater than the
price paid for the stock issued.

NOTE 6/DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS

  The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.

 Derivatives

  The Company has only limited involvement with derivative financial
instruments, none of which are used for trading purposes. Derivatives are used
to hedge exposure to fluctuations in costs caused by the price volatility of
certain metal commodities and natural gas supplies. Gains and losses
associated with these hedging transactions become part of the cost of the item
being hedged. At no time during 1997, 1996 or 1995 were such hedging
transactions material.

 Long-term debt

  The estimated fair value of the Company's long-term debt (including current
portions thereof), using quoted market prices of Company debt securities
recently traded and market-based prices of similar securities for those
securities not recently traded, was $328 million at December 31, 1997 and $322
million at December 31, 1996 as compared with the carrying value of $308
million and $316 million included in the balance sheet at year-end 1997 and
1996, respectively.

NOTE 7/PROVISIONS FOR RESTRUCTURING

  In the fourth quarter of 1997, the Company recorded a charge of $10 million
relating to additional restructuring provisions for previously discontinued
raw material operations primarily related to retiree health care and other
benefit costs.

  At year-end 1996, the Company recorded a charge of $26 million for
provisions related to pensions, health care, and severance costs resulting
from a salaried workforce reduction plan.

  In the 1995 third quarter, the Company recorded a charge of $35 million for
provisions related to pensions, health care, and severance costs resulting
from the acceptance by approximately 300 salaried Company employees of a
voluntary retirement package offered during the quarter. In addition, the
Company announced the closure of its plate operation. Provisions for pensions
and other employee benefits related to the shutdown of this operation had been
previously accrued.

  With the closure of the plate operation, the Company completed the workforce
reduction program announced in 1991. A final computation of the employee
benefit costs required for the 1991 program resulted in

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                     F-10
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

unused reserves due to differences between the actual makeup of the population
leaving the Company under this program and the projections used in 1991. The
Company, therefore, reversed $65 million of unused reserves from the balance
sheet and recorded a corresponding credit to income in the third quarter of
1995.

  During the 1995 third quarter, the Company also increased reserves by $7
million for additional benefit costs at a closed iron ore mining facility and
by $2 million for a further writedown of non-operating assets of the former
construction business. Reserves relating to environmental matters were
increased by $7 million.

  The Company has taken initiatives to reduce its production costs by shutdown
of certain Indiana Harbor Works facilities and raw materials operations.
Reserve balances related to provisions for these shutdowns, which include
long-term liabilities for mine reclamation costs and employee benefits,
totaled $129.5 million, $131.6 million and $135.9 million at December 31,
1997, 1996 and 1995, respectively.

NOTE 8/RETIREMENT BENEFITS

 Pensions

  The Inland Steel Industries Pension Plan and Pension Trust, which covers
certain employees of the Company, also covers certain employees of Industries
and of certain of Industries' other subsidiaries. The plan is a non-
contributory defined benefit plan with pensions based on final pay and years
of service for all salaried employees and certain wage employees, and years of
service and a fixed rate (in most instances based on frozen pay or on job
class) for all other wage employees, including members of the United
Steelworkers of America. Because the fair value of pension plan assets
pertains to all participants in the plan, no separate determination of the
fair value of such assets is made solely with respect to the Company.

  Effective April 30, 1996, that portion of the Industries pension plan
covering current and former employees of Ryerson Tull, Inc., a majority owned
subsidiary of Industries, was separated and became the Ryerson Tull Pension
Plan. Due to this separation, Industries remeasured each subsidiary's benefit
obligation using plan data and actuarial assumptions as of the date of
separation. An amount of assets proportional to the liabilities assumed by the
Ryerson Tull Pension Plan was allocated to such plan.

  The funded status of the Industries pension plan (excluding Ryerson Tull,
Inc.) as of September 30, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                                           SEPTEMBER 30
                                                                           -------------
                                                                            1997   1996
                                                                           ------ ------
                                                                            DOLLARS IN
                                                                             MILLIONS
      <S>                                                                  <C>    <C>
      Fair value of plan assets..........................................  $1,991 $1,729
                                                                           ------ ------
      Actuarial present value of benefits for service rendered to date:
        Accumulated Benefit Obligation based on compensation to date.....   1,894  1,746
        Additional benefits based on estimated future compensation levels      73    105
                                                                           ------ ------
        Projected Benefit Obligation.....................................   1,967  1,851
                                                                           ------ ------
      Plan assets in excess of (shortfall to) Projected Benefit
       Obligation........................................................  $   24 $ (122)
                                                                           ====== ======
</TABLE>

  In 1996, Industries recorded an additional minimum pension liability of
$76.3 million representing the excess of the unfunded Accumulated Benefit
Obligation over previously accrued pension costs. A corresponding intangible
asset was recorded as an offset to this additional liability as prescribed.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                     F-11
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------


  The calculation of benefit obligations was based on a discount (settlement)
rate of 7.5% in 1997 and 8.0% in 1996; a rate of compensation increase of 4.0%
in both 1997 and 1996; and a rate of return on plan assets of 9.5% in both
1997 and 1996.

  Pension cost for the Company for 1997, 1996 and 1995 was $7.3 million, $4.1
million and $9.3 million, respectively. In 1997 and 1995, the Company paid
$29.3 million and $86.0 million, respectively, to Industries for its share of
a contribution to the Industries Pension Trust.

 Benefits Other Than Pension

  Substantially all of the Company's employees are covered under
postretirement life insurance and medical benefit plans that involve
deductible and co-insurance requirements. The postretirement life insurance
benefit formula used in the determination of postretirement benefit cost is
primarily based on applicable annual earnings at retirement for salaried
employees and specific amounts for hourly employees. The Company does not
prefund any of these postretirement benefits. Effective January 1, 1994, a
Voluntary Employee Benefit Association Trust was established for payment of
health care benefits made to United Steelworkers of America retirees. Funding
of the Trust is made as claims are submitted for payment.

  The amount of net periodic postretirement benefit cost for 1997, 1996 and
1995 is composed of the following:

<TABLE>
<CAPTION>
                                                                1997  1996  1995
                                                                ----  ----  ----
                                                                  DOLLARS IN
                                                                   MILLIONS
      <S>                                                       <C>   <C>   <C>
      Service cost............................................. $ 10  $ 10  $  9
      Interest cost............................................   62    66    68
      Net amortization and deferral............................  (15)  (11)  (20)
                                                                ----  ----  ----
          Total net periodic postretirement benefit cost....... $ 57  $ 65  $ 57
                                                                ====  ====  ====
</TABLE>

  The following table sets forth components of the accumulated postretirement
benefit obligation:

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30
                                                                -------------
                                                                 1997   1996
                                                                ------ ------
                                                                 DOLLARS IN
                                                                  MILLIONS
      <S>                                                       <C>    <C>
      Accumulated postretirement benefit obligation
       attributable to:
        Retirees............................................... $  538 $  479
        Fully eligible plan participants.......................     87     77
        Other active plan participants.........................    265    236
                                                                ------ ------
      Accumulated postretirement benefit obligation............    890    792
        Unrecognized net gain..................................    179    255
        Unrecognized prior service credit......................     35     42
                                                                ------ ------
      Accrued postretirement benefit obligation................  1,104  1,089
      Expense, net of benefits provided, October through
       December................................................      4      8
      Workforce reduction provision............................    --       4
                                                                ------ ------
      Accrued postretirement benefit obligations at December
       31...................................................... $1,108 $1,101
                                                                ====== ======
</TABLE>

  Any net gain or loss in excess of 10 percent of the accumulated
postretirement benefit obligation is amortized over the remaining service
period of active plan participants.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                     F-12
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------


  The assumptions used to determine the plan's accumulated postretirement
benefit obligation are as follows:

<TABLE>
<CAPTION>
                                                                       SEPTEMBER
                                                                          30
                                                                       ---------
                                                                       1997 1996
                                                                       ---- ----
      <S>                                                              <C>  <C>
      Discount rate................................................... 7.5% 8.0%
      Rate of compensation increase................................... 4.0% 4.0%
      Medical cost trend rate......................................... 4.5% 4.5%
</TABLE>

  A one percentage point increase in the assumed health care cost trend rates
for each future year increases the sum of the service cost and interest cost
components of the annual net periodic postretirement benefit cost and the
accumulated postretirement benefit obligation as of September 30, 1997 by $9
million and $106 million, respectively.

NOTE 9/INCOME TAXES

  The Company participates in a tax-sharing agreement under which current and
deferred income tax provisions are determined for each company in the
Industries group on a stand-alone basis. Any current liability is paid to
Industries. If the Company is unable to use all of its allocated tax
attributes (net operating loss and tax credit carryforwards) in a given year
but other companies in the consolidated group are able to utilize them, then
the Company will be paid for the use of its attributes. NOL and tax credit
carryforwards are allocated to each company in accordance with applicable tax
regulations as if a company were to leave the consolidated group. Companies
with taxable losses record current income tax credits not to exceed current
income tax charges recorded by profitable companies. If Industries uses NOL
carryforwards, the Company will use the appropriate portion of that year's
carryforward previously allocated to it, if any.

  A state tax sharing agreement, similar to the federal agreement, also exists
with Industries for those states in which the consolidated group is charged
state taxes on a unitary or combined basis.

  The elements of the provisions for income taxes for each of the three years
indicated below were as follows:

<TABLE>
<CAPTION>
                                                        YEARS ENDED
                                                        DECEMBER 31
                                                     -----------------------
                                                     1997     1996     1995
                                                     -----    -----    -----
                                                        DOLLARS IN
                                                         MILLIONS
      <S>                                            <C>      <C>      <C>
      Current income taxes:
        Federal..................................... $13.8Cr. $27.8Cr. $30.7Cr.
        State and foreign...........................    .3       .2       .1
                                                     -----    -----    -----
                                                      13.5Cr.  27.6Cr.  30.6Cr.
      Deferred income taxes.........................  47.2     24.1     72.8
                                                     -----    -----    -----
        Total tax expense or benefit                 $33.7    $ 3.5Cr. $42.2
                                                     =====    =====    =====
</TABLE>
--------
Cr. = Credit

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                     F-13
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------


  The components of the deferred income tax assets and liabilities arising
under FASB Statement No. 109 were as follows:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                                  ------------
                                                                  1997   1996
                                                                  -----  -----
                                                                  DOLLARS IN
                                                                   MILLIONS
      <S>                                                         <C>    <C>
      Deferred tax assets (excluding postretirement benefits
       other than pensions):
        Net operating loss and tax credit carryforwards.......... $ 274  $ 282
        Restructuring and termination reserves...................    29     24
        Other deductible temporary differences...................    43     81
        Less: Valuation allowances...............................    (3)    (3)
                                                                  -----  -----
                                                                    343    384
                                                                  -----  -----
      Deferred tax liabilities:
        Fixed asset basis difference.............................   458    442
        Other taxable temporary differences......................    61     64
                                                                  -----  -----
                                                                    519    506
                                                                  -----  -----
          Net deferred liability excluding postretirement
           benefits other than pensions..........................  (176)  (122)
      FASB Statement No. 106 impact (postretirement benefits
       other than pensions)......................................   396    389
                                                                  -----  -----
          Net deferred asset..................................... $ 220  $ 267
                                                                  =====  =====
</TABLE>

  For tax purposes, the Company had available, at December 31, 1997, net
operating loss ("NOL") carryforwards for regular federal income tax purposes
of approximately $651 million which will expire as follows: $214 million in
2006, $265 million in 2007, $109 million in 2008, $6 million in 2009 and $57
million in 2011. The Company also had investment tax credit and other general
business credit carryforwards for tax purposes of approximately $6 million,
which expire during the years 1998 through 2006. A valuation allowance has
been established for those tax credits which are not expected to be realized.
Additionally, in conjunction with the Alternative Minimum Tax ("AMT") rules,
the Company had available AMT credit carryforwards for tax purposes of
approximately $41 million, which may be used indefinitely to reduce regular
federal income taxes.

  The Company believes that it is more likely than not that all of the NOL
carryforwards will be utilized prior to their expiration. This belief is based
upon the factors discussed below.

  The NOL carryforwards and existing deductible temporary differences
(excluding those relating to FASB Statement No. 106) are substantially offset
by existing taxable temporary differences reversing within the carryforward
period. Furthermore, any such recorded tax benefits which would not be so
offset are expected to be realized by continuing to achieve future profitable
operations.

  Subsequent to the adoption of FASB Statement No. 109, the Company adopted
FASB Statement No. 106 and recognized the entire transition obligation at
January 1, 1992 as a cumulative effect charge in 1992. At December 31, 1997,
the deferred tax asset related to the Company's FASB Statement No. 106
obligation was $396 million. To the extent that future annual charges under
FASB Statement No. 106 continue to exceed

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                     F-14
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

deductible amounts, this deferred tax asset will continue to grow. Thereafter,
even if the Company should have a tax loss in any year in which the deductible
amount would exceed the financial statement expense, the tax law provides for
a 20-year carryforward period of that loss. Because of the extremely long
period that is available to realize these future tax benefits, a valuation
allowance for this deferred tax asset is not necessary.

  The Industries group operates in a highly cyclical industry and consequently
has had a history of generating and then fully utilizing significant amounts
of NOL carryforwards. During the years 1986 through 1989, the Industries group
utilized approximately $600 million of NOL carry forwards and for the years
1995 and 1997 in total utilized approximately $283 million of NOL
carryforwards.

  Total income taxes reflected in the Consolidated Statement of Operations
differ from the amounts computed by applying the federal corporate tax rate as
follows:

<TABLE>
<CAPTION>
                                                        YEARS ENDED
                                                        DECEMBER 31
                                                      ----------------------
                                                      1997     1996    1995
                                                      -----    ----    -----
                                                         DOLLARS IN
                                                          MILLIONS
      <S>                                             <C>      <C>     <C>
      Federal income tax expense or benefit computed
       at statutory tax rate of 35%.................  $31.0    $4.4Cr. $38.9
      Additional taxes or credits from:
        State and local income taxes, net of federal
         income tax effect..........................    5.6     1.3      5.3
        Percentage depletion........................    3.0Cr.  2.8Cr.   2.9Cr.
        All other, net..............................     .1     2.4       .9
                                                      -----    ----    -----
          Total income tax expense or benefit.......  $33.7    $3.5Cr. $42.2
                                                      =====    ====    =====
</TABLE>
--------
Cr. = Credit

NOTE 10/I/N TEK AND I/N KOTE JOINT VENTURES

  I/N Tek, a general partnership formed for a joint venture between the
Company and Nippon Steel Corporation ("NSC"), owns and operates a cold-rolling
facility. I/N Tek is 60% owned by a wholly owned subsidiary of the Company and
40% owned by an indirect wholly owned subsidiary of NSC. The Company has
exclusive rights to the productive capacity of the facility, except in certain
limited circumstances, and, under a tolling arrangement with I/N Tek, has an
obligation to use the facility for the production of cold rolled steel. Under
the tolling arrangement, the Company was charged $149.2 million, $144.8
million and $147.5 million in 1997, 1996 and 1995, respectively, for such
tolling services. Industries and NSC each have guaranteed a portion of long-
term financing of I/N Tek. At December 31, 1997, Industries' share of such
guaranty amounted to $116 million.

  The Company and NSC also own and operate another joint venture which
consists of a 400,000 ton electrogalvanizing line and a 500,000 ton hot-dip
galvanizing line adjacent to the I/N Tek facility. I/N Kote, the general
partnership formed for this joint venture, is owned 50% by a wholly owned
subsidiary of the Company and 50% by an indirect wholly owned subsidiary of
NSC. The Company and NSC each have guaranteed the share of long-term financing
attributable to their respective subsidiary's interest in the partnership. I/N
Kote had $376 million outstanding under its long-term financing agreement at
December 31, 1997. I/N Kote is required to buy all of its cold rolled steel
from the Company, which is required to furnish such cold rolled steel at a
price that results in an annual return on equity to the partners of I/N Kote,
depending upon operating levels, of up to 10% after operating and financing
costs; this price may be subject to an adjustment if the Company's return on

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                     F-15
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

sales differs from I/N Kote's return on sales. Purchases of Company cold
rolled steel by I/N Kote aggregated $320.6 million in 1997, $314.9 million in
1996 and $303.7 million in 1995. At year-end 1997 and 1996, I/N Kote owed the
Company $12.8 million and $18.4 million, respectively, related to these
purchases. Prices of cold rolled steel sold by the Company to I/N Kote are
determined pursuant to the terms of the joint venture agreement and are based,
in part, on operating costs of the partnership. In 1997, 1996 and 1995, the
Company sold cold rolled steel to I/N Kote at prices that exceeded the
Company's production costs but were less than the market prices for cold
rolled steel products. I/N Kote also provides tolling services to the Company
for which it was charged $22.1 million in 1997, $24.5 million in 1996 and
$32.6 million in 1995. The Company sells all I/N Kote products that are
distributed in North America.

NOTE 11/INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

  The Company's investments in unconsolidated joint ventures accounted for by
the equity method consist primarily of its 60% interest in I/N Tek, 50%
interest in I/N Kote, 50% interest in PCI Associates, 40% interest in the
Empire Iron Mining Partnership, 15% interest in Wabush Mines in 1996 and 1995
and 12-1/2% interest in Walbridge Electrogalvanizing Company. I/N Tek and I/N
Kote are joint ventures with NSC (see Note 10). The Company does not exercise
control over I/N Tek, as all significant management decisions of the joint
venture require agreement by both of the partners. Due to this lack of control
by the Company, the Company accounts for its investment in I/N Tek under the
equity method. PCI Associates is a joint venture which operates a pulverized
coal injection facility at the Indiana Harbor Works. Empire is an iron ore
mining and pelletizing ventures owned in various percentages primarily by U.S.
steel companies. In 1997, the Company sold its interest in Wabush Mines,
resulting in a $9 million pretax gain. Walbridge is a venture that coats cold-
rolled steel in which Inland has the right to 25% of the productive capacity.
Following is a summary of combined financial information of the Company's
unconsolidated joint ventures:

<TABLE>
<CAPTION>
                                                     1997     1996     1995
                                                   -------- -------- --------
                                                      DOLLARS IN MILLIONS
      <S>                                          <C>      <C>      <C>
      Results of Operations for the Year Ended
       December 31:
        Gross revenue............................. $1,112.9 $1,207.7 $1,183.1
        Costs and expenses........................    998.7  1,131.7  1,100.8
                                                   -------- -------- --------
        Net income................................ $  114.2 $   76.0 $   82.3
                                                   ======== ======== ========
      Financial Position at December 31:
        Current assets............................ $  229.9 $  264.0 $  269.1
        Total assets..............................  1,385.8  1,789.7  1,838.5
        Current liabilities.......................    211.6    229.2    253.5
        Total liabilities.........................  1,000.3  1,401.2  1,457.9
        Net assets................................    385.5    388.5    380.6
</TABLE>

NOTE 12/COMMITMENTS AND CONTINGENCIES

  At year-end 1997, the Company guaranteed $18.3 million of long-term debt
attributable to a subsidiary's interest in PCI Associates.

  As part of the agreement covering the 1990 sale of the Inland Lime & Stone
Company division assets, the Company agreed, subject to certain exceptions, to
purchase, at prices which approximate market, the annual limestone needs of
the Indiana Harbor Works through 2002.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                     F-16
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------


  The Company and its subsidiaries have various operating leases for which
future minimum lease payments are estimated to total $80.1 million through
2022, including approximately $16.1 million in 1998, $12.6 million in 1999,
$10.1 million in 2000, $9.1 million in 2001, and $8.7 million in 2002.

  It is anticipated that the Company will make capital expenditures of $2
million to $5 million annually in each of the next five years for the
construction, and have ongoing annual expenditures of $40 million to $50
million for the operation, of air and water pollution control facilities to
comply with current federal, state and local laws and regulations. The Company
is involved in various environmental and other administrative or judicial
actions initiated by governmental agencies. While it is not possible to
predict the results of these matters, the Company does not expect
environmental expenditures, excluding amounts that may be required in
connection with the consent decree in the 1990 EPA lawsuit, to materially
affect the Company's results of operations or financial position. Corrective
actions relating to the EPA consent decree may require significant
expenditures over the next several years that may be material to the results
of operations or financial position of the Company. At December 31, 1997, the
Company's reserves for environmental liabilities totaled $25 million, $19
million of which related to the sediment remediation under the 1993 EPA
consent decree.

  The total amount of firm commitments of the Company and its subsidiaries to
contractors and suppliers, primarily in connection with additions to property,
plant and equipment, approximated $22 million at year-end 1997.

NOTE 13/RELATED PARTY TRANSACTIONS

  Industries has established procedures for charging its administrative
expenses to the operating companies owned by it. These charges are for
management, financial and legal services provided to those companies. Charges
from Industries for 1997, 1996 and 1995 totaled $13.7 million, $16.4 million
and $17.6 million, respectively.

  There are also established procedures to charge interest on all intercompany
loans within the Industries group of companies. Such loans currently bear
interest at the prime rate. For 1997, 1996 and 1995, the Company's net
interest expense to companies within the Industries group totaled $18.4
million, $17.6 million and $14.4 million, respectively.

  The Company sells to and purchases products from related companies at
prevailing market prices. These transactions for the indicated years, except
those with I/N Kote (see Note 10), are summarized as follows:

<TABLE>
<CAPTION>
                                                             1997   1996   1995
                                                            ------ ------ ------
                                                            DOLLARS IN MILLIONS
      <S>                                                   <C>    <C>    <C>
      Net product sales.................................... $208.4 $204.3 $196.5
      Net product purchases................................   16.2   19.0   19.9
</TABLE>

NOTE 14/CONCENTRATION OF CREDIT RISK

  The Company produces and sells a wide range of steels, of which
approximately 99% consists of carbon and high-strength low-alloy steel grades.
Approximately 78% of the sales were to customers in five mid-American states,
and 94% were to customers in 20 mid-American states. Over half the sales are
to the steel service center and transportation (including automotive) markets.

  Sales to General Motors Corporation approximated 10% of consolidated net
sales in 1995. No other customer, except I/N Kote (see Note 10), accounted for
more than 10% of the consolidated net sales of the Company during any of the
three years ended December 31, 1997.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                     F-17
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
         (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------


NOTE 15/CONSOLIDATED QUARTERLY SALES AND EARNINGS (UNAUDITED)

<TABLE>
<CAPTION>
                                                             1997
                                               ------------------------------------
                                                FIRST   SECOND    THIRD    FOURTH
      DOLLARS IN MILLIONS                      QUARTER  QUARTER  QUARTER  QUARTER*
      -------------------                      -------  -------  -------  ---------
      <S>                                      <C>      <C>      <C>      <C>
      Net sales............................... $606.6   $643.8   $615.7    $601.4
      Gross profit............................   50.5     51.6     50.1      28.7
      Net income..............................   13.7     21.0     18.2       1.9
<CAPTION>
                                                             1996
                                               ------------------------------------
                                                FIRST   SECOND    THIRD    FOURTH
      DOLLARS IN MILLIONS                      QUARTER  QUARTER  QUARTER  QUARTER**
      -------------------                      -------  -------  -------  ---------
      <S>                                      <C>      <C>      <C>      <C>
      Net sales............................... $615.7   $604.9   $574.9    $601.8
      Gross profit............................   23.4     23.6     38.2       8.9
      Net loss................................   (2.1)    (2.7)    (3.0)    (10.1)
</TABLE>
--------
*Includes $9.6 million additional restructuring provisions, $6.7 million after
   tax.
**Includes $26.3 million workforce reduction provision, $17.1 million after
   tax.

NOTE 16/RECENT DEVELOPMENTS

  On March 17, 1998, Industries announced it had signed a binding letter
agreement with Ispat International N.V. ("Ispat") whereby Ispat will acquire
the Company for a total transaction value of approximately $1.43 billion. The
agreement has been approved by the Boards of Directors of both Industries and
Ispat. As part of the $1.43 billion transaction, Ispat will: i) pay $650
million in cash for the common stock of the Company held by Industries; ii)
pay $238.2 million for the preferred stock of the Company held by Industries;
iii) repay the intercompany debt of the Company owed to Industries, which at
December 31, 1997, was $230.7 million; and iv) assume debt owed to third
parties of approximately $307.9 million. The sale is subject to a definitive
agreement, antitrust clearance, other closing conditions, and the need to give
the United Steelworkers of America the opportunity to make an offer to
purchase the Company. It is anticipated that the transaction will close in the
third quarter of 1998.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                     F-18
<PAGE>

                 INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
          (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)

                             SCHEDULE II--RESERVES

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                              DOLLARS IN MILLIONS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                              PROVISIONS FOR ALLOWANCES,
                                             CLAIMS AND DOUBTFUL ACCOUNTS
                                      ------------------------------------------
                                      BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
                                      BEGINNING   CHARGED     FROM      END OF
YEARS ENDED DECEMBER 31                OF YEAR   TO INCOME  RESERVES     YEAR
-----------------------               ---------- --------- ---------- ----------
<S>                                   <C>        <C>       <C>        <C>
1997.................................   $17.9      $ 4.5    $6.1(A)     $16.1
                                                            $ .2(B)
1996.................................   $24.3      $ 1.1    $6.4(A)     $17.9
                                                            $1.1(B)
1995.................................   $19.3      $10.6    $5.6(A)     $24.3
</TABLE>
--------
NOTES:
(A) Allowances granted during year.
(B) Bad debts written off during year.



--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                      F-19
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
  EXHIBIT                                                            SEQUENTIAL
  NUMBER                         DESCRIPTION                          PAGE NO.
  -------                        -----------                         ----------
 <C>       <S>                                                       <C>
  2.       Copy of Letter Agreement between Inland Steel
           Industries, Inc. and Ispat International N.V. ("Ispat")
           for the acquisition of Inland Steel Company by Ispat,
           dated March 16, 1998...................................
  3.(i)    Copy of Restated Certificate of Incorporation, as
           amended, of the Company. (Filed as Exhibit 3-A to the
           Company's Annual Report on Form 10-K for the fiscal
           year ended December 31, 1992, and incorporated by
           reference herein.)
  3.(ii)   Copy of By-Laws, as amended, of the Company. (Filed as
           Exhibit 3.(ii) to the Company's Annual Report on Form
           10-K for the fiscal year ended December 31, 1994, and
           incorporated by reference herein.)
  4.A      Copy of First Mortgage Indenture, dated April 1, 1928,
           between the Company (the "Steel Company") and First
           Trust and Savings Bank and Melvin A. Traylor, as
           Trustees, and of supplemental indentures thereto, to
           and including the Thirty-Fifth Supplemental Indenture,
           incorporated by reference from the following Exhibits:
           (i) Exhibits B-1(a), B-1(b), B-1(c), B-1(d) and B-1(e),
           filed with Steel Company's Registration Statement on
           Form A-2 (No. 2-1855); (ii) Exhibits D-1(f) and D-1(g),
           filed with Steel Company's Registration Statement on
           Form E-1 (No. 2-2182); (iii) Exhibit B-1(h), filed with
           Steel Company's Current Report on Form 8-K dated
           January 18, 1937; (iv) Exhibit B-1(i), filed with Steel
           Company's Current Report on Form 8-K, dated February 8,
           1937; (v) Exhibits B-1(j) and B-1(k), filed with Steel
           Company's Current Report on Form 8-K for the month of
           April, 1940; (vi) Exhibit B-2, filed with Steel
           Company's Registration Statement on Form A-2 (No. 2-
           4357); (vii) Exhibit B-1(l), filed with Steel Company's
           Current Report on Form 8-K for the month of January,
           1945; (viii) Exhibit 1, filed with Steel Company's
           Current Report on Form 8-K for the month of November,
           1946; (ix) Exhibit 1, filed with Steel Company's
           Current Report on Form 8-K for the months of July and
           August, 1948; (x) Exhibits B and C, filed with Steel
           Company's Current Report on Form 8-K for the month of
           March, 1952; (xi) Exhibit A, filed with Steel Company's
           Current Report on Form 8-K for the month of July, 1956;
           (xii) Exhibit A, filed with Steel Company's Current
           Report on Form 8-K for the month of July, 1957; (xiii)
           Exhibit B, filed with Steel Company's Current Report on
           Form 8-K for the month of January, 1959; (xiv) the
           Exhibit filed with Steel Company's Current Report on
           Form 8-K for the month of December, 1967; (xv) the
           Exhibit filed with Steel Company's Current Report on
           Form 8-K for the month of April, 1969; (xvi) the
           Exhibit filed with Steel Company's Current Report on
           Form 8-K for the month of July, 1970; (xvii) the
           Exhibit filed with the amendment on Form 8 to Steel
           Company's Current Report on Form 8-K for the month of
           April, 1974; (xviii) Exhibit B, filed with Steel
           Company's Current Report on Form 8-K for the month of
           September, 1975; (xix) Exhibit B, filed with Steel
           Company's Current Report on Form 8-K for the month of
           January, 1977; (xx) Exhibit C, filed with Steel
           Company's Current Report on Form 8-K for the month of
           February, 1977; (xxi) Exhibit B, filed with Steel
           Company's Quarterly Report on Form 10-Q for the quarter
           ended June 30, 1978; (xxii) Exhibit B, filed with Steel
           Company's Quarterly Report on Form 10-Q for the quarter
           ended June 30, 1980; (xxiii) Exhibit 4-D, filed with
           Steel Company's Annual Report on Form 10-K for the
           fiscal year ended December 31, 1980; (xxiv) Exhibit 4-
           D, filed with Steel Company's Annual Report on Form 10-
           K for the fiscal year ended December 31, 1982; (xxv)
           Exhibit 4-E, filed with Steel Company's Annual Report
           on Form 10-K for the fiscal year ended December 31,
           1983; (xxvi) Exhibit 4(i) filed with the Steel
           Company's Registration Statement on Form S-2 (No. 33-
           43393); (xxvii) Exhibit 4 filed with Steel Company's          --
</TABLE>

                                       i
<PAGE>

<TABLE>
<CAPTION>
  EXHIBIT                                                            SEQUENTIAL
  NUMBER                         DESCRIPTION                          PAGE NO.
  -------                        -----------                         ----------
 <C>       <S>                                                       <C>
           Current Report on Form 8-K dated June 23, 1993;
           (xxviii) Exhibit 4.C filed with Steel Company's
           Quarterly Report on Form 10-Q for the quarter ended
           June 30, 1995; (xxix) Exhibit 4.C filed with Steel
           Company's Quarterly Report on Form 10-Q for the quarter
           ended September 30, 1995, and (xxx) Exhibit 4.C filed
           with Steel Company's Quarterly Report on Form 10-Q for
           the quarter ended June 30, 1996.
  4.B      Copy of consolidated reprint of First Mortgage
           Indenture, dated April 1, 1928, between the Company and
           First Trust and Savings Bank and Melvin A. Traylor, as
           Trustees, as amended and supplemented by all
           supplemental indentures thereto, to and including the
           Thirteenth Supplemental Indenture. (Filed as Exhibit 4-
           E to Form S-1 Registration Statement No. 2-9443, and
           incorporated by reference herein.)
  24       Powers of attorney.....................................
  27       Financial Data Schedule
</TABLE>

                                       ii